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India’s Monetary Policy Committee cut its benchmark interest rate by 25 basis points on Thursday and moved to a more accomodative stance, just months after it had cautioned against rising inflation risks and said it was in a ‘calibrated tightening’ mode.

The change in the committee’s perspective followed months of lower-than-expected inflation data, which forced it to reassess inflation pressures in the economy and the correct policy response to it.

Not surprisingly, the RBI’s off-the-mark inflation projections drew criticism, with some questioning whether the 50 basis points in rate hikes announced in 2018 were necessary.

Addressing that criticism, RBI deputy governor Viral Acharya on Thursday said that the central bank takes this criticism seriously. He, however, added that the RBI’s track record in projection inflation accurately is no different from the experience of global central banks, who have also seen inflation veer off the expected track in recent years.

If you look internationally, you observe two distinct patterns. One is that food is always the volatile component. And in economies where food is a bigger component of the basket, these are the central banks that tend to make larger errors. We have done a study which shows that once you control for the volatile food basket, the relative errors that the Indian central bank makes are not that out of line with what happens elsewhere in the world.

Viral Achara, Deputy Governor, RBI

As part of its February monetary policy review, the RBI once again revised its projections for headline inflation to 2.8 percent for the fourth quarter of the current financial year. It also cut its inflation forecast for the first half of 2019-20 to 3.2-3.4 percent.

For the financial year 2018-19, inflation projections have now been revised lower twice by a substantial degree.

Acharya attributed surprises in inflation figures to demonetisation earlier and now the supply glut in certain commodities. Several food groups are experiencing excess supply conditions domestically as well as internationally, as per the MPC’s statement. Hence, the short-term outlook for food inflation appears particularly benign, despite adverse base effects, it said.

Improving Inflation Forecasts

While explaining some its errors, the RBI said it is working to explain its forecasting abilities.

We should take this criticism seriously and we do. We are, internally, quite introspective about the lament we keep hearing.

Viral Achara, Deputy Governor, RBI

Acharya said the central bank had made sub-groups within the econometric modelling team to focus on individual items through the RBI’s regional offices. The modelling team, he said, is also trying to get an early sense of the numbers released by the central statistics office.

It is challenging for the central bank to make real-time projections based on supply numbers received once a year, Acharya said, adding that he hoped the RBI would get better at forecasting over time.